China's investor confidence in Pakistan's energy sector transformation needs to be reestablished

In recent years, China has seen a noticeable shift in its investment portfolio in Pakistan, with energy investments accounting for just 34% of the total between 2021 and 2024, a significant drop from the 40-50% in previous years.

This change is evident in the second phase of the China-Pakistan Economic Corridor (CPEC), known as CPEC 2.0. This phase, primarily invested in by China and Pakistan through joint ventures and agreements worth around $8.5 billion, is focusing on areas such as agriculture, IT, minerals, textiles, and industry. Chinese companies and investors are playing a significant role in this initiative, which is backed by Chinese state-related financial institutions as part of the broader Belt and Road Initiative.

However, one Chinese company, the China Three Gorges Group, has not reinvested in Pakistan since 2016. Once Pakistan's largest clean energy investor, the group had a portfolio that included three wind farms (150 MW capacity) and the Karot hydropower project (720 MW). Instead, its South Asian investment arm, China Three Gorges South Asia Investment Limited (CSAIL), has shifted focus to Egypt and Jordan, where it recently installed 400 MW of solar and wind projects.

The reasons for this shift are not hard to find. Developers have cited Pakistan's high-risk profile and political turmoil as key deterrents for investment. This is further highlighted by the fact that between 2005 and 2024, China invested almost $68 billion in Pakistan's economy, but only $4.86 billion of that has been invested in Pakistan's energy sector since the onset of the Covid-19 pandemic.

The Pakistan government's recent decisions, such as the exclusion of the Kohala and Mahl projects from its energy generation planning, have further dampened investor enthusiasm. The Kohala project, a hydropower project in Pakistan with a capacity of 1,124 MW, has secured initial approvals but lacks authorisation from Sinosure, China's state-owned export credit insurer.

Despite these challenges, the presidents of Pakistan and China recently reaffirmed their commitment to further bilateral cooperation under CPEC 2.0 and mutual support on issues of core interest. CPEC 2.0 aims to develop industrialisation, agriculture, and technology transfer through Special Economic Zones (SEZs), with a potential focus on clean energy and electric mobility.

However, for Pakistan to attract further investment, it needs to address its security risks, ensure policy stability, and honour contractual obligations. Unless it does so, it may struggle to compete with regions like the Middle East and Southeast Asia, which offer greater regulatory predictability and economic stability.

In conclusion, while China's investment in Pakistan has shifted away from energy and towards areas like agriculture, IT, and industry, there are still opportunities for growth and cooperation under CPEC 2.0. However, for Pakistan to fully realise these opportunities, it must address the challenges that have deterred investment in the past.